Insurance Center

As the numbers of bankruptcies increase, those whole manage self-funded workman's comp programs are becoming increasingly concerned. In the event that fund managers notice that one of their participating companies is facing financial troubles there are several measures that can be applied designed to force the participating company that is self-insured to set up additional collateral to cover its risk.

Although the state regulations can limit the amount required, in some states, when there is a concern about possible future company defaults, managers can require the establishment of a security fund to increase its routine assessment of all members.

In the very worst-case scenarios, to make up for a shortage of funds some funds might possibly have to assess members after their defaults.
It is generally agreed by fund managers that have been interviewed that they would rather find out about a company's troubles as early as possible, while there is still time to require added collateral and before the fund has to make demands on other members to strengthen the security fund balance.

A member of the New Jersey Self Insurer's Guaranty Assn. executive board and the executive director of the National Council of Self-Insurers in New Providence, N.J., Larry Holt, says that as a member of the New Jersey Self Insurer's Guaranty fund executive committee, he is obligated to the other self-insured companies in the state to closely monitor the financial situation since if someone goes under, then the other members would have to make up the slack in order to maintain the fund's balance.

In the past there have been shortages that occurred in self-insured workers comp funds.

As an example, in 2003, in California there was a $54 million deficit following several companies bankruptcies by companies that had understated their workers comp exposure and, as a result, had posted inadequate collateral, said Jeff Pettegrew, executive director of the Walnut Creek based California Self Insurers' Security Fund.

During the intervening years the State of California has tightened its rules for setting up collateral and has work to restructure its security fund. There is an alternative security program that is available from companies with the higher risk ratings.

Each company's credit rating is used to determine the amount paid into the fund by the company, rather than having to post collateral with the state. In the case however, of those companies whose credit rating is not sufficient to qualify them for the alternative fund, they must post collateral with the State of California that is set to be at least 135% of their projected claims.

Pettegrew says that he is considering hiring a claims professional to manage those claims that are being now handled by the fund's contracted third-party administrators. He says that his immediate concern is with regard to about 30 alternative security fund participants whose credit ratings, because of the current economic conditions have fallen below B-/B3 credit ratings.